Socializing Capital: The Rise of the Large Industrial Corporation in America

Socializing Capital

Socializing Capital

The Rise of the Large

Industrial Corporation

in America

William G. Roy

Princeton University Press

Princeton, New Jersey

Copyright © 1997 by Princeton University Press

Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540

In the United Kingdom: Princeton University Press, Chichester, West Sussex

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Roy, William G., 1946–

Socializing capital : the rise of the large industrial

corporation in America / William G. Roy

p. cm.

Includes bibliographical references (p. ) and index.

ISBN 0-691-04353-1 (alk. paper)

1. Big business—United States—History. 2. Corporations—United States—

Finance—History. 3. Industrial policy—United States—History.

4. Capitalism—United States—History. 5. Social structure—United States—

History. 6. Rich people—United States—History. 7. Power

(Social sciences—United States—History. I. Title.

HD2785.R5981996

338.6'44'0973—dc2096-8672CIP

This book has been composed in Sabon

Princeton University Press books are printed on acid-free paper and meet the guidelines for permanence and durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources

Printed in the United States of America by Princeton Academic Press

1 2 3 4 5 6 7 8 9 10

For my Parents

James and Nona Roy

Who Taught me to be Curious

About the World and to Care

About the People in it

Contents

List of Figures

List of Tables

Preface

Chapter One

Introduction

Chapter Two

A Quantitative Test of Efficiency Theory

Chapter Three

The Corporation as Public and Private Enterprise

Chapter Four

Railroads: The Corporation’s Institutional Wellspring

Chapter Five

Auxiliary Institutions: The Stock Market, Investment Banking, and Brokers

Chapter Six

Statutory Corporate Law, 1880–1913

Chapter Seven

Prelude to a Revolution

Chapter Eight

American Industry Incorporates

Chapter Nine

Conclusion: A Political Sociology of the Large Corporation

Notes

References

Index

Figures

1.1. Aggregate Value of Stocks and Bonds of Corporations Listed on Major Stock Exchanges, 1890–1913

4.1. Total Traffic Earnings of U.S. Railroads, 1851–1890

6.1. Total Capital (Logged) of Major Corporations in Three States, 1890–1913

6.2. Total Number of Incorporations in Three American States, 1880–1913

8.1. Annual Output of Cigarettes and Little Cigars, 1880–1906

8.2. Value of Products of Branches of the Tobacco Industry, 1904

8.3. American Tobacco Company Advertising Costs and Percentage Change in Net Receipts, 1894–1910

8.4. Aggregate Capital of Major Corporations in Four Industries, 1891–1913

Tables

1.1. Historical Account of the Rise of the Large Corporation

2.1. Comparison of Industries with Major Corporations and Those without

2.2. Estimated Logistic Regression on Whether an Industry Had Major Corporations: Analysis of Maximum Likelihood Estimations

2.3. Estimated Regression Coefficients on Aggregate Corporate Capital in Industries with any Major Corporations, 1900–1904

2.4. Estimation of Tobit Model for Average Authorized Capital, 1912: Analysis of Maximum Likelihood Estimates

6.1. Corporate Laws of Three States, 1900

7.1. Economic Characteristics of the Malt Liquor Industry, 1880, 1900

7.2. Economic Characteristics of the Cotton Oil Industry, 1800, 1900

7.3. Economic Characteristics of the Cane Sugar Industry, 1800, 1900

8.1. Economic Characteristics of the Paper Industry (except Wallpaper), 1880, 1900

Preface

Historical sociology seeks to understand how the world we live in was constructed. Just as we cannot intimately know a person until we know his or her childhood, it is difficult to understand a society until we know its history. Few features of contemporary American society are more far-reaching or awesome than its large industrial corporations, the largest of which command more resources than the majority of nations in the world, employ more people than live in many cities, and shape our daily life more thoroughly than previously dominant institutions such as religion. This book asks why large American industrial corporations arose when they did, how they did, and where they did. Scholars in many disciplines have addressed this question, and their answers reflect some of the fundamental debates across and within sociology, history, economics, political science, and geography. The prevailing answer, which I characterize as efficiency theory, holds that large industrial corporations arose because they were more efficient than competing forms, an explanation that assumes that rational decision making, market processes of exchange, and technological development underlie economic activity. In contrast to efficiency as the fundamental determinant, I focus on power, not as a motivation for action—I am not trying to revive the debate over whether the first generation of corporate officials were robber barons or captains of industry—but as an explanatory concept for social relations. The two master concepts start with different questions. An efficiency theory asks why an organizational form like the corporation is more efficient than the partnerships and proprietorships that it replaced. A power theory begins with the question of who acted to transform one property regime into another and investigates how capital was reconfigured from the individual to the social level. I am not saying that efficiency theory is absolutely wrong or that there is nothing to learn from the scholars that have adopted its framework. Rather, the conditions under which efficiency might explain why one organizational form replaces another are (a) rare, and (b) did not exist in late nineteenth-century America. My argument is fundamentally historical: markets, selective processes of organizational change, and technological development, along with predatory monopolies, economic domination, and waste, wax and wane historically, and require historical explanation.

I began this study by focusing on the period around the turn of the century, hoping to understand the kind of institutional earthquake that transformed a society in 1890 with fewer than ten large publicly owned manufacturing corporations into one that by 1905 was dominated by many of the corporate giants that continue to reign. Most earlier authors aimed to explain the decision to adopt the corporate form, an approach that led them to focus on the corporation’s advantageous features such as limited liability or perpetual existence. But this begs the question of why the corporate form was there to adopt and why it had the characteristics it did. Answering that pushed my analysis back further. As others have emphasized, the corporation was not created in the form that was adopted during the corporate revolution; it began as a quasi-public agency created by states to perform public services such as building turnpikes or canals, for which states vested it with special privileges such as limited liability. So the first historical puzzle is how the corporation was transformed from an extension of state power into the quintessence of private property, a sanctuary from government authority. It became clear that the explanation is not merely economic, but that the history of the corporation requires us to understand how the modern boundaries between the political and the economic were constituted. I focus on the political processes that created the corporate institution commonly known as Wall Street. Its development presents a second historical puzzle. Although by the 1870s the corporate institution, including investment banks, brokerage houses, business press, and other components, existed much as it does today, it remained confined to transportation and communication until the turn of the century. Why did manufacturing remain institutionally separate from the corporate system for so long? And why was the corporate revolution so explosive when it finally occurred?

My analysis touches other currents in sociology. The social constructionists ask how taken-for-granted categories, structures, and assumptions have been historically developed; they reject the notion that such things as race, gender, markets, or the nature of time and space are fixed in nature and insist that their very constitution must be explained. The new economic sociology and the new institutionalism in organizations have brought the social constructionist approach to the study of the corporation per se. I align myself with the general spirit of those perspectives, tempered with a healthy dose of political sociology’s emphasis on power. Indeed, if I must characterize my perspective in these terms, I would call this work a political sociology of the corporation.

But most fundamentally, my perspective is sociological. Although one recent line of thought has brought utilitarian assumptions, deductive logic, and evolutionary functionalism from economics into other social sciences, sociologists have in the last decade or so more forcefully asserted that political and economic life can be analyzed with the same fundamental concepts—interaction, power, cooperation, organization, division of labor, and so on—as the rest of social life. In other words, the boundaries between the social sciences are becoming less a matter of the topic examined than a matter of the conceptual tools and logical reasoning employed. This book aims to offer a more vitally sociological explanation of how the American corporate institution developed.

Until one writes a book, the litany of people typically acknowledged in books cannot be fully comprehended. When one does, it becomes patently clear how social the authorship of a book is. The community of scholars does more than exchange finished products. The finished products are the fruits that we collectively harvest. I have the privilege of claiming one tree as mine, but it was planted and nurtured by a broad group of indispensable and talented individuals. The National Science Foundation generously funded the collection of the quantitative data in Chapter 2 (SES 86 17679). Research assistants on various phases have included Jody Borrelli, Leslie Dwyer, Gail Livings, Rachel Parker-Gwin, Blake Rummel, and Teri Shumate. Nabil-El Ghourney volunteered his time as part of UCLA’s Student Research Project and Cathrine Y. Lee worked in the Summer Minority Research Program. Although Rachel Parker-Gwin was employed as a research assistant, her contribution far transcends the label. From initial formulation to tidying up grammar and everything in between, she was a true colleague, improving every facet of the project. The staff of UCLA’s Inter-Library Loan program spent many patient hours tracking down and procuring obscure historical sources, while the staff of the Social Science Computing facility made the data analysis easier. My greatest intellectual debts are to my generous and gifted colleagues who read part or all of the manuscript. Peter Carstensen, William Forbath, Patricia Harrington, and Frank Munger offered their expert opinions on the legal chapter. Craig Calhoun allowed me to work out some of my early ideas in an article published in his Comparative Social Research annual reader. The Macrosociology Research Seminar at UCLA over the years has provided a level of feedback far beyond what one would normally expect. Peter Dougherty, my editor at Princeton University Press, has enthusiastically supported the project from its conception. Good editors make for better books, and I have been lucky to have one of the best. Elizabeth Gretz’s copyediting improved readability. Frank Dobbin, Neil Fligstein, Mark Mizruchi, Karen O’Neill, Charles Perrow, Michael Schwartz, and anonymous reviewers gave the best of feedback—minutely detailed, unflinchingly tough, impressively insightful, and consistently constructive. The book is much better for their effort. The careful reader will see the imprint of two scholars in particular. Maurice Zeitlin, my colleague at UCLA, has been a prodder, supporter, inspiration, critic, and friend. Chuck Tilly, my dissertation adviser at the University of Michigan, has continued to offer his wisdom, brilliance, and example to this project. And although even careful readers could not detect it, every page manifests the congenial and collegial shadow of my wife Alice, not the long-suffering supporter that sometimes appears in acknowledgments, but the scholar and partner that authors should hope for. Any errors or omission that the reader may find are no doubt due to my stubbornness or ignorance, not the careful work of all these distinguished colleagues and friends.

Socializing Capital

Chapter One

Introduction

In the first year of this century, a group of bankers led by the venerable J. P. Morgan and a group of steel men created the U.S. Steel Corporation, America’s first billion-dollar corporation. Built around the core of the former Carnegie Steel Company, U.S. Steel merged nearly all major producers of iron, steel, and coke. Public opinion at the time focused on its mammoth size and its potential monopoly power. Looking back, we recognize it as a symbol of a broader movement that we now metaphorically but appropriately call the corporate revolution. As in political revolutions, the economic changes that came to a head in these years were cataclysmic and far reaching. Like the transformations in France, Russia, or China, the corporate revolution had been brewing from slower, evolutionary changes, but was triggered by a set of events unanticipated by most of the participants. The nature of this revolution, its causes and consequences, have been energetically debated in both academic and popular circles, often with thinly veiled ideological overtones. But all agree that the corporate revolution was a major watershed in American history. The period at the turn of the twentieth century marked the transformation from one way of life to another, from a society based on rural, agrarian, local, small-scale, individual relations to one based on urban, industrial, national, large-scale, and organizational relations. At the heart of this was the rise of the large industrial corporation, which has continued to cast its shadow over all society ever since.

Americans recognized U.S. Steel as a milestone even if they did not realize all its historical ramifications. Only twenty years earlier, an entity like U.S. Steel would have been implausible. Although the institutional structure of corporate capitalism, including the stock market, investment banks, brokerage houses, and the financial press had been operating for decades, it was confined almost entirely to government bonds, transportation, and communication. The large, publicly traded manufacturing corporation was rare.

The large manufacturing corporation, unusual before 1890, became the dominant mode of business organization in two major steps. The first was the creation of the large private business corporate institution itself, its origins as a quasi-government agency and its metamorphosis into private property. The historical question is how an organizational form constituted as an extension of state power to accomplish publicly useful projects was transformed into a sanctuary from state power as the institutional basis of private accumulation. This was achieved in the 1870s. But until the century’s end, the corporate institutional structure was confined to those arenas of economic life that Western governments have generally claimed special jurisdiction over, namely, infrastructural sectors of transportation, communication, and finance.

The second step was the extension of the corporate institutional structure into manufacturing. As late as 1890, fewer than ten manufacturing securities were traded on the major stock exchanges, and most of those, like Pullman’s Palace Car Company were closely associated with the railroad (Manual of Statistics 1890). The world of manufacturing and the world of finance capital were institutionally distinct. Investors considered manufacturing companies too risky and industrialists resisted surrendering control to outsiders (Navin and Sears 1955; Carosso 1970). To be sure, there were large corporations. The hundred-million-dollar Pennsylvania Railroad was the largest company in the world. And there were large manufacturing companies. Carnegie Steel Company, an unincorporated limited partnership, was the largest manufacturing operation in the world (Wall 1989). The institutional structures of those two giants, however, were distinct from each other. Industrialists created firms through personal funds, reinvested mercantile capital, and internal growth. Andrew Carnegie started his steel company from personal profits amassed speculating in railroads and built it by selling steel to railroad and locomotive companies. He had close personal relations with railroad leaders, but few institutional relations outside of market transactions (Wall 1989). As in most industrial firms, ownership was personal and confined to one or a few individuals.

Wall Street, in contrast, operated as a distinct institutional structure, following the dynamics of a speculative securities market, only indirectly related to the world of manufacturing. The stocks and bonds traded there financed railroads, telegraph, municipalities, and governments. The railroad companies which laced the country with steel rails were considered virtual money machines for local elites, who were convinced that their city would become the next St. Louis, the archetypical boom town; for the deep-pocketed foreign investors, who hoped to capture their profits from America’s Manifest Destiny; and for the investment bankers and stock brokers, who enjoyed commissions from others’ investments as well as reaping the profits of their own.

In the years around the turn of the century, these two institutions, the industrial world of manufacturing and the financial world of stocks and bonds, merged together in what we now call the corporate revolution, a remarkably abrupt proliferation of large manufacturing corporations from virtually nothing to economic domination. Starting from 1890, the aggregate amount of capital in publicly traded manufacturing companies crept up until 1893, when the depression stalled economic expansion, then jumped from $33 million in 1890 to $260 million the following year (see Figure 1.1). But these figures were small compared with the multibillion-dollar totals after the turn of the century. In 1901 the food industry alone totaled $210 million in common stocks (Manual of Statistics 1901). The major expansion began after 1897, and in 1898 almost reached a billion dollars. It doubled in 1899 to over two billion, and doubled again over the subsequent two years, and hit over seven billion dollars in 1903. It then fluctuated around the six- to seven-billion-dollar mark until the outbreak of World War I. These figures from the years 1898 to 1903 trace a major change from one economic system to another, a new corporate order in manufacturing. The total par value of manufacturing stocks and bonds listed on the major exchanges in 1904 was $6.8 billion, more than half the $11.6 billion book value of all manufacturing capital enumerated in the 1904 census (U.S. Bureau of the Census 1975, 684).¹

Figure 1.1 Aggregate Value of Stocks and Bonds of Corporations Listed on Major Stock Exchanges, 1890–1913 (Source: Data drawn from Manual of Statistics.)

The Significance of the Corporation

All agree that the events around the turn of the century were transformative and profoundly changed the nature of American society. But the nature of those changes has been vigorously debated, not only in terms of what explains the transformation, but also in terms of what is to be explained. Managerialists have described these changes as the rise of the modern business enterprise and have emphasized the internal organization of managerial structures (Chandler 1969, 1977, 1990). Historians of technology have described the inventions and practices that created the system of mass production (Piore and Sabel 1984; Hounshell 1984). Some business historians have focused on the process by which large corporations were formed through mergers (Nelson 1959; Lamoreaux 1985). Sociologists as well as historians have set the new large firms within the context of an organizational revolution in all major social institutions (Galambos 1970; Boulding 1953; Lash and Urry 1987; Perrow 1991). Organizational sociologists have emphasized the conception and structure of control over the enterprise (Fligstein 1990; Perrow 1986; Zald 1978). Marxists have analyzed the relationships between the classes within the productive process (Edwards 1979; Gordon, Edwards, and Reich 1982; Braverman 1974). All of these different perspectives identify important and consequential changes in the social dynamics of how our society creates and distributes material resources. Despite the different emphases, they address the same agenda in two ways: first, they all agree that the appearance of U.S. Steel, General Electric, American Tobacco, and similar entities marked a major transformation in the American social structure. Second, they have all participated in a major underlying debate over the extent to which the economy operates according to an economic logic based on efficiency or operates according to a social logic based on institutional arrangements, including power.

This book makes two simple claims. First, I argue that one of the most fundamental and dynamic facets of the transformation underlying the rise of entities like U.S. Steel was a shift in the form and organization of property, as constituted in major political and economic institutions. The large publicly traded corporation transformed the organization of ownership so that economic entities were each owned by many individuals rather than a few, and many individuals owned pieces of many units. This transformation socialized property, altering the basic relationships among owners, workers, managers, suppliers, and consumers. That is not to say that managerial structures, technologies, mergers, or systems of control were unimportant. Each of them had major autonomous effects, but their effects were refracted through the institutional relations of property. Second, I will argue that efficiency theory, the prevailing explanation of change in the organization of the economy, is inadequate to explain the rise of the large publicly traded industrial corporation. This chapter discusses some of the logical problems of efficiency theory; Chapter 2 demonstrates that it cannot explain variation among industries in the extent of incorporation, which its proponents assert it should be able to do. In contrast to efficiency theory, I argue that the concept of power provides a theoretically sounder and empirically more accurate foundation for understanding such economic processes as the rise of the large corporation.

The main body of this book will be a historical account of the rise of the large-scale industrial corporation in America. The discussion is based on the concepts of power, property, and institutions. From a quasi-public device used by governments to create and administer public services such as turnpikes and canals, the corporation germinated within a system of stock markets, brokerage houses, and investment banks. With railroads it shed its public accountability, then redefined its legal underpinning to redefine the nature of property, and then only when fully mature, flowered at the turn of this century into the realm of manufacturing, when many of the same giants that still dominate the American landscape were created. But before the story is told, it is necessary to clarify basic concepts.

Efficiency Theory

Although Weber’s (1978) discussion of rationalization first raised the issue of the relationship between efficiency and the rise of large-scale economic enterprise early in this century, business historians and economists have developed the most influential efficiency explanations of the rise of large socially capitalized corporations in particular. Efficiency theory includes several variations that share the assumption that there is a selection process that ensures that more efficient economic forms will prevail over less efficient forms. Classical and neoclassical economics, focusing on the invisible hand of the market, describe how the independent decisions of individual buyers and sellers collectively determine what products will be produced, what technologies will be adopted, and what kinds of firms will thrive or wither. Institutional economists argue that transaction costs or institutional incentive structures (Williamson 1981; North 1981) select among competing organizational forms; they hypothesize the conditions under which firms will compete with one another in the market or join forces to create managerial hierarchies. The economic historian offering the most influential, best-known, and most formidable efficiency account of the corporate revolution is Alfred D. Chandler (1977, 1990).² Briefly stated, his argument is that technological changes created economies of scale, encouraging larger productive units, while vastly improved transportation and communication systems stimulated national and international markets, making it necessary to rationalize and integrate the stages of production and build extensive distribution organizations under the control of managerially administered bureaucratic hierarchies. The visible hand of management replaced the invisible hand of the market in coordinating and administering the economy. Rather than a process by which the aggregation of many actions to buy or sell products determines which products will be produced by which technologies—Adam Smith’s invisible hand—the visible hand of managers makes these decisions within administrative hierarchies. Chandler summarizes the rise of modern business enterprise:

This institution appeared when managerial hierarchies were able to monitor and coordinate the activities of a number of business units more efficiently than did market mechanisms. It continued to grow so that these hierarchies of increasingly professional managers might remain fully employed. It emerged and spread, however, only in those industries and sectors whose technology and markets permitted administrative coordination to be more profitable than market coordination. Because these areas were at the center of the American economy and because professional managers replaced families, financiers, or their representatives as decision makers in these areas, modern American capitalism became managerial capitalism. (1977, 11)

Chandler argues that when technological innovation increased the velocity of throughput (the speed at which raw materials move through the production process and are manufactured into finished products), firms could reduce the cost of production per unit and increase the output per worker, producing economies of scale that rendered administrative coordination more efficient than market coordination—the visible hand of hierarchy replacing the invisible hand of the market. The modern corporation was a rational innovation that performed productive tasks better than proprietorships and partnerships. This book offers an alternative analysis of the institutionalization of the large publicly traded manufacturing corporation in America.

The new economic sociology in the past decade, despite many variations, has been united on one basic point—a fundamental critique of efficiency theory (Granovetter 1985; Etzioni 1988; Powell and DiMaggio 1991; Friedland and Robertson 1990; Roy 1990; Fligstein 1990; Perrow 1990; Campbell, Hollingsworth, and Lindberg 1991; Jacoby 1990; Berk 1990, 1994). I would describe efficiency theory in terms that would be consistent with most who write from this perspective: according to efficiency theory, the actors that produce and distribute goods and services compete over scarce resources so that only the efficient survive. Whether efficiency is created by the adoption of productive technologies, rational organization, the ability to choose what products customers are willing to buy, or simple competency, the economic system is shaped by the structural selection of efficient actors. Thus if a product, technology, practice, or relationship arises and thrives, it must be because it is more efficient than its alternatives. Railroads arose because they were more efficient modes of transportation, factories arose because they were more efficient means of producing commodities, large factories arose because economies of scale made them more efficient than small factories, and the corporation arose because it was a more efficient organization than partnerships.

At its most basic, it is difficult to quarrel with the general formula. Ceteris paribus, when individual or organizational actors compete over scarce resources, the more efficient is most likely to prevail. I do not deny that efficiency dynamics are ever relevant or even that they might play a role in most economic processes. But the caveat, ceteris paribus, is the theory’s Achilles’ heel; things are almost never equal. In fact, things are often so unequal that they overwhelm efficiency considerations. Efficiency does not operate apart from other social processes like power. This problem is manifested in several ways.

Efficiency theory assumes a singular decision-making entity, that is, it assumes one actor assessing the advantages and disadvantages of a choice before making a decision. It interprets the creation of corporations like American Tobacco or U.S. Steel as a decision to take advantage of economies of scale and managerial hierarchies. But who is it that decides to take advantage of economies of scale? Large corporations were created by many decisions, often from many motivations. Sometimes many owners merged; often investors and promoters participated; sometimes managers were involved; and in some cases, customers, suppliers, or workers played a role. What needs to be explained is the social process by which various actors came together to negotiate their mutual and conflicting interests. Power is one of the most significant dimensions of social interaction in this process (Perrow 1981).

Efficiency theory only explains why actors might have been motivated to form large corporations, not why they were able to. Forming a large corporation required far greater resources than most companies could themselves mobilize, resources that were very unevenly distributed across the economy. If large corporations had been rational for manufacturing firms in 1850, they still would not have been created because those who controlled necessary resources would not have been willing to invest in them. When such corporations were formed at the turn of the century, power influenced the distribution of resources to industries where corporations were formed. Efficiency theory treats uneven availability as a flaw, an imperfect capital market that operated as an impersonal structure. I argue that power was basic to the system, highly institutionalized, and controlled by key decision makers, not a free capital market.

Insofar as actors do act to maximize their utilities, an explanation of change must also explain why available choices exist and why the effects of each choice follow. If an industrialist is faced with the choice of bankruptcy or merger and chooses merger, an explanation should not merely cite his rationality, but should explain why those choices and only those choices were available to him, including the actions of other businessmen that created a situation in which there was a rational choice to be made. The ability to determine the consequences of other people’s actions is a form of power, as elaborated below.

Efficiency theory fits a functional logic, which implies an evolutionary process of change. Such theories are logically problematic because they explain change in terms of consequences: it is not an explanation to say that major corporations arose because they fulfilled certain functions better than other forms and that the corporation became common because it had the consequence of greater efficiency, effectiveness, and productivity. Insofar as corporations make more efficient use of new technologies, stabilize costs in the face of high fixed costs, or increase profits, such consequences can be used as causes only under certain circumstances which do not apply here (Roy 1990). According to census figures, some industries, like glucose, became more efficient after the corporate revolution; others, like agricultural machinery or iron and steel, became less efficient.³

Property, Power, and Institutions

While others have framed the rise of the large corporation in terms of managerial hierarchies, technological developments, mergers of smaller firms, the general growth of large organizations, the conception of internal control, and the conflict between classes, I examine major corporations as a form of property set within a broader institutional structure shaped by the dynamics of power at least as much as by efficiency. The major, publicly traded large-scale corporation constituted a new type of property, socialized property (Zeitlin 1989). Socialized property means that instead of each firm being owned by one or a few individuals, each firm became owned by many individuals, and individual owners in turn typically owned pieces of many firms.⁴ In the process the social nature of property itself was transformed. The consideration of property implies a degree of inequality, that the social processes determining the shape of the economy are explainable by power, not just efficiency. Moreover, the social relations of property and the underlying dynamics of power are set within the inter-organizational frameworks we know as institutions. This section sketches how the concepts of property, power, and institution shape the analysis of the corporate revolution and concludes that they intersect at the concept of social class.

Property

Property can be defined as the set of politically enforced rights, entitlements, and obligations that people have in relationship to objects and in relationship to other individuals (owners and nonowners). Rights include such things as authority to make decisions about what products to produce or whom to hire as labor, and how to dispose of a completed product. The conventional conception of property rights emphasizes that property rights limit government intrusion in the same sense that the right of free speech or religion limits the government’s powers over individuals (Ryan 1987). Entitlements involve matters such as profits from the use of objects. Capitalism makes no distinction between the entitlement of using objects for oneself and regulating how others may use objects that one owns. A factory or leased land are legally equivalent to one’s clothes or residence. Obligations are a matter of accountability concerning objects, especially liability for injuries suffered while using objects or debts incurred while using them. Although courts, especially in this century, have tightened the liability that owners have concerning injury related to their property, the corporation’s limited liability has shielded owners from any risk greater than their invested capital. I want to emphasize three points about this definition: the fact that the specific rights, entitlements, and obligations are variable rather than fixed; the social nature of property relations; and the active role of the state in enforcing property rights.

First, the specific rights, entitlements, and obligations are quite variable. Contrary to classic liberalism, there are no inherent or natural property rights. The conception of inalienable or natural property rights existing prior to society or history may have been an effective ideology for creating capitalism, but it has clouded the historical analysis of what specific rights, entitlements, and obligations govern economic relations. Rather, the content of property relations is historically constructed and must be explained, not taken for granted. The rise of the corporation fundamentally changed the nature of the rights, entitlements, and obligations bundled with ownership of productive enterprise (Berle and Means 1932; Horwitz 1977; Sklar 1988; Creighton 1990; Lindberg and Campbell 1991). The nominal owners effectively lost many of their rights, entitlements, and obligations. Whereas previously the right to determine what products to produce or whom to hire and the entitlement to profits and the obligation to pay debts had been bundled together with ownership, the corporation separated them.⁵ Courts and legislatures increasingly treated the corporation as an entity in itself, legally distinct from the individuals who owned it, and increasingly treated management, not stockholders, as its representative. For example, prior to the 1880s, when a railroad entered receivership, judges ordinarily appointed a committee of owners, bondholders, and debtors to reorganize it. But the practice changed abruptly when judges began to appoint managers. Given that receivership was one of the primary means of altering the distribution of entitlements, stockholders were substantially disenfranchised (Berk 1994).

The second point to emphasize about this definition is that property is a social relationship; it involves rights, entitlements, and obligations not only in relation to an object itself but also in relationship to other individuals (Hurst 1978; Horwitz 1977; Renner 1949). The owner of a factory not only has the right to decide what to use his or her factory for, a relationship of the owner to the object, but also the right of authority over others participating in using the factory, the right to distribute the value created in the factory (an entitlement), and obligations to pay debts incurred in production. The social relationship among owners, managers, suppliers, workers, and customers was radically altered by the corporation. No particular owner retained any authority over any particular worker, but all authority was mediated through the board of directors and management. Rather than freeing those who run enterprise to become soulful, managers are constrained to maximize profits for those to whom they are ultimately accountable.

Third, this definition of property emphasizes that property is a relationship enforced by the state (Sklar 1988; Weber 1978; Zald 1978; Fligstein 1990; Lindberg and Campbell 1991; Campbell and Lindberg 1991; Scheiber 1975). Although the American state has developed a relatively small apparatus to regulate markets and oversee production, even at its most laissez-faire, it defined and enforced the rights, entitlements, and obligations of property. Even the freest of markets requires specific government actions and policies to enforce contracts, punish cheaters, regulate money, and ensure stability. There is no such thing as nonintervention (Polanyi 1957). The corporation is a creation of the law, a legal fiction. Natural individuals are automatically recognized by the law and have a basic right to own property, sign contracts with others concerning that property, and sell that property without explicit recognition by the state. But a corporation exists only when chartered by the state. A group of natural individuals can constitute themselves as an organization, and can sign individual contracts defining their economic relationship to one another and the rights and obligations they have to the organization, but the organization itself cannot exercise property rights, sign enforceable contracts, or sell property unless it is explicitly granted that right by the state. Thus explaining the rise of the large industrial corporation requires analysis of the legal changes underlying corporate property. Although most treatments of the American state have focused on the federal government, it was the individual states that were constitutionally and practically responsible for defining and enforcing property rights. There was considerable variation among the states in the particular rights, entitlements, and obligations that came with incorporation, and these differences affected the form and location of corporations. At the one extreme, by the end of the century New Jersey allowed corporations to own other corporations, making it the overwhelming choice of huge mergers, while at the other, Ohio continued to uphold double liability, by which owners were liable not only for their invested capital but for an additional amount equal to it.

I will argue that corporate rights and entitlements and the new social relations enforced by the state did not dissolve the class nature of property as much as they changed it by socializing it throughout the class and by creating an organizational mediation among the classes and class segments (Zeitlin 1980, 1989).⁶ By mediation, I mean that the underlying class relationship became redefined in terms of not just one’s relationship to legal ownership but one’s social relationship to corporate property. The relationships that class describes, such as hiring people to labor, exercising authority over decisions about what to produce or what technologies to adopt, determining how products are sold, are now mediated by the corporation. One is no longer hired by individuals, but hired by a corporation; one can no longer sue owners, but only the corporation. In contemporary America, one’s relationship to corporations is now the most important determinant of wealth. Whether one works for a corporation, manages a corporation, owns stock in a corporation, or lends money to a corporation differentiates the wealthy from the rest. To assert that the large corporation did not dissolve the capitalist class does not mean that I claim that class dynamics by themselves explain the rise of the corporation, nor does it indicate that the capitalist class acted as an organized, coherent, or conscious group throughout these events. The extent to which class interests are at stake, that is, the extent to which people objectively gain or lose from historical events, the extent to which people with common class interests act in concert, and the extent to which they are aware that they share interests with others are empirical questions, not articles of faith. But such issues of class do belong on the agenda for explaining how economic relationships change. When class interests (or the interests of class segments) are at stake, such as when manufacturers were resisting corporate takeover, the outcome will be determined in large part by the extent to which people with common class interests act in common. For example, the antitrust legal actions corroded class solidarity among small and medium-sized manufacturers, making it easier for corporate capitalists, who were knitted together by shared ownership and common investment institutions, to prevail both economically and legally.

Power

The conventional sociological definition of power is taken from Weber (1978): the ability of one actor to impose his or her will on another despite resistance. I broaden that to define power as the extent to which the behavior of one person is explained in terms of the behavior of another. Like Weber’s, this definition characterizes a relationship rather than a single person. It incorporates Weber’s definition as one dimension of power, behavioral power, which refers to the visible overt behavior of the power wielder in the form of a command, request, or suggestion. But Weber’s definition does not go far enough to cover all the ways that behavior is affected by others. There is a second dimension of power, structural power, the ability to determine the context within which decisions are made by affecting the consequences of one alternative over another. For example, an employer that hires sociology majors rather than economics majors structures the consequences of choosing a major and is exercising power over students deciding on a major.⁷

This second dimension of power, structural power, allows us to include rational action within a theory of power. The concept of structural power permits a variety of motives for behavior, including rationality. The fact that an actor rationally decides to maximize his or her utility does not mean that power is irrelevant to an explanation of behavior; power operates in setting up the choices the actor faces and the consequences of any particular action. For example, most of the new manufacturing corporations formed at the turn of the century were mergers of many entrepreneurially owned companies. Many proud, hardworking manufacturers sold their family legacy for stock certificates and a demotion from owner to manager. Why? Efficiency theory posits that economies of scale and productive technologies led to ruinous competition and the necessary amalgamation into managerial hierarchies. Such accounts are devoid of actors except for the rationalizing managers creating a more efficient division of labor. But we also need to know what alternatives the owners of merged firms faced and who determined the consequences of their choices. If an owner had to choose between competing against a corporation selling products below cost or joining a merger and enjoying continuing profits, it is understandable that he or she chose the latter. The choices the manufacturers faced in 1899 were radically different from those of just a decade earlier, and to understand why manufacturers incorporated we must also understand how financiers, government officials, and other industrialists affected the consequences of reorganizing enterprise within the corporate system, in other words, the institutional structure.

In this perspective rationality becomes an empirical question, not an a priori assumption. Compared with efficiency theory, power theory thus proposes a very different agenda for research: Who made the decisions that created large industrial corporations? What were the alternative choices they faced? To what extent did rationality, social influence, or other decision-making logics shape their decisions? Who set the alternative choices and the consequences of each alternative they faced? How did their choices shape the alternatives and payoffs for other actors? One of the reasons these questions are often difficult to answer is that the alternative choices and the payoffs are embedded within institutions whose genesis has been forgotten or obscured.

Institutions

As a system of property relations shaped by the dynamics of power, corporations operated within and helped constitute a social institution (Meyer and Rowan 1977; DiMaggio and Powell 1983; Zucker 1988; Powell and DiMaggio 1991). To understand how the corporation operates requires more than knowing how it works internally, the people who operate it, its goals and strategies, or its division of labor and hierarchy. By social institution I mean the matrix of organizations, taken-for-granted categories, and the agreed-upon modes of relationship among those organizations that administer a major social task. The concept includes three analytically distinct aspects: (1) Institutions use a set of categories and practices that are understood to be the way things are done (Meyer and Rowan 1977). Corporations develop a standard division of authority among the owners, directors, managers, and workers; particular accounting practices to measure performance and validate strategies; customary separation of white-collar and blue-collar occupations; and characteristic bureaucratic structures that codify procedures. Institutional practices include such practices as issuing stock, speculation, hiring and promotion of workers and managers, and measurement of success in terms of balance sheets. (2) Institutions include a matrix of organizations, or an organizational field, that in the aggregate constitutes a recognized area of institutional life (DiMaggio and Powell 1983). Just as the medical institution includes hospitals as well as laboratories or medical schools, the institution of corporate capitalism includes factories and railroads as well as the stock markets, investment banks, brokerage houses, and news organizations. Thus when I speak of major public corporations I mean much more than those companies that happen to be incorporated. I mean companies that are legally incorporated and that operate within the institutional structures of corporate capitalism by publicly offering their securities to the securities market, raising capital through investment banks, recruiting directors from the community of corporate directors, and socializing ownership through widespread ownership. It was the transformation of manufacturing enterprise into this institutional structure that exploded at the end of the nineteenth century in the corporate revolution. (3) Institutions describe cultural categories, a sense of reality, a thing (Zucker 1977, 1983). All members of society recognize that medicine, education, politics, and mass media are institutions. They are real. The institutionalization of the entities that do things is more than just a codification of existing practices; the process selects from among competing alternative forms by designating one form as real or established while marginalizing other forms as experimental, fledgling, novel, alternative, or artificial. This process was very important in the institutionalization of the corporation in the late nineteenth century, when writers from a variety of ideological perspectives, speaking to many different types of audiences, declared that good or bad, the corporation was here to stay. Although in retrospect it may appear that things could have been different, the nearly universal feeling that large corporations were inevitable was an important part of their institutionalization, a cause as well as a result of how large corporations became the standard way of doing business.

What is the relationship among property, power, and institutions? All three are interwoven together throughout this analysis, but three propositions succinctly capture their relationship.

Power institutionalizes property. The specific rights, entitlements, and obligations that the state enforces relative to objects is determined by the operation of power and embedded within institutions. Corporate lawyers were able to persuade the New Jersey legislature to change its corporate law to allow corporations to own stock in other corporations, a right that had been previously denied to both partnerships and corporations and that, once granted, created the legal basis for the corporate revolution at the end of the century. The New Jersey legislature was more compliant than other states because that state had long enjoyed a profitable relationship with railroad corporations. The choices it faced and the relative payoff of each differed from the situation faced by other states. The relationship among power, institution, and property was very reflexive and historical: early exercise of power institutionalized a set of property relationships that became the context within which power was exercised to embed new property relations within the institutional relations of corporate capital.

Property institutionalizes power. The specific rights, entitlements, and obligations that are embedded within institutions shape the context within which people make decisions. Those who want to benefit from how a system operates do not need to constantly impose their will, but institutions reproduce power relationships. Berle and Means (1932) describe how in the late nineteenth and early twentieth centuries, such new legal features of the corporations as proxy voting and no par stock⁸ disenfranchised stockholders. New property relations were the means by which small stockholders lost power.

Power and property shape institutions. Just as Starr (1982) describes how physicians prevailed to shape modern medicine or Logan and Molotch (1988) demonstrate how property relations shape modern urban relations, a major theme of this book is how